To demonstrate its view that the country is on the right trajectory despite many challenges, Fitch Ratings has affirmed its robust BB-sovereign rating of Nigeria with a stable outlook, citing several positive features of the economy to support its position.
According to Fitch, such features include improving stability in the economy after the suspension of the Central Bank of Nigeria (CBN) Governor, Sanusi Lamido Sanusi; the recent boost in the Excess Crude Account (ECA); rising oil production and improved efforts to tackle pipeline vandalism.
The agency has also affirmed Nigeria’s short-term foreign currency Issuer Default Ratings (IDR) at ‘B’ and Country Ceiling at ‘BB-’.
The global rating organisation, in its report released in Abuja, yesterday, said the affirmation also indicates that the demand for foreign exchange in the official auction which reverted to normal levels in March and CBN intervention in the inter-bank market, has fallen away.
The inter-bank Naira/US dollar rate, it said, has also strengthened from its lows, although it remains outside the upper limit of the 155 plus or minus 3 per cent band.
“Official reserves rose in March, helped by an increase in the ECA fiscal buffer. Although reserves have fallen appreciably over the past year, they remain in line with the ‘BB’ category peer medians at a Fitch projected 4.6 months current account payments (CXP) at 2014 end, although weaker than similarly rated oil exporters (Angola and Gabon),” Fitch reports.
“On 25 March, the Monetary Policy Committee continued the gradual tightening of liquidity seen over the past year, with an increase in the private sector cash reserve requirement to 15 percent. Inflation fell to a new low of 7.7 per cent in February, within the target range of 6 per cent to 9 percent,” it further stated.
Fitch believes that as an institution, the CBN has been strengthened in recent years and should retain its autonomy over monetary and financial policy, notwithstanding the suspension of its former governor.
It affirmed that oil production remains volatile but rose in Quarter One of 2014 (1Q14) to average 2.25mb/d, in line with the trailing 12-month average, and above the recent low of 2.1mb/d in November/December 2013.
It stressed: “Improved production and increased efforts to tackle pipeline vandalism and oil theft may help explain the increase in the ECA in March. The issue of corruption in the oil sector and lack of transparency in oil flows has gained heightened prominence this year and the President has agreed to a forensic audit of the flows between state-owned oil corporation, Nigerian National Petroleum Corporation (NNPC), and the budget.
“A tight budget has been approved. It assumes a conservative oil price of USD77.5/bl and a more realistic oil production assumption of 2.39mb/d. Although production shortfalls are likely to continue, allowing further drawing on the ECA, the authorities aim to increase the ECA this year. The budget envisages a fall in revenue and spending, although the latter will be achieved mainly through a more realistic assessment of capital spending capacity.” Other factors supportive of the affirmation, according to the agency include: Nigeria’s low debt burden, which after the recent GDP re-basing is just 12.6 per cent of GDP (general government) at end-2013, is well below medians throughout the rating scale.
Fitch’s debt sustainability analysis shows the debt ratio would remain well below the ‘BB’ median in any plausible scenario, it emphasized, noting that continued strong growth, which has averaged 6.8 per cent over the past five years, led by non-oil growth of an average 7.7 per cent.
It said the revised national accounts show that growth accelerated to 7.4 per cent in 2013, with a 5.2 per cent increase in the energy sector as gas production increased, notwithstanding a fall in oil production.
Fitch continued: “The GDP rebasing shows a more diversified economy, with the non-oil sector comprising 86 per cent of GDP and services now put at 52 percent of GDP (previously 29 per cent) with oil and agriculture sectors now having a reduced share in the GDP.
“Nigeria’s sovereign and overall external balance sheets, current account surplus, debt service ratio and external liquidity are all stronger than ‘BB’ category medians. However, the current surplus has been declining (4.1 per cent of GDP in 2013) and may be overstated given large errors and omissions. Foreign Direct Investment (FDI) is less than one per cent of GDP, and is among the lowest in the region.
“Reform progress remains mixed. Electricity generation and distribution are now in private hands but transmission remains a problem and output remains volatile, affected by gas supply and other problems. Agricultural reforms continue to gain traction, leading to higher output and a reduced import bill. However, the Petroleum Industry Bill (PIB) remains stalled. Strong vested interests make structural reform a continual struggle.
“Nigeria’s ratings are constrained by weak governance as measured by the World Bank, low per capita income, even after the 89 per cent uplift to 2013 GDP due to rebasing, and vulnerability of public finances and reserves to oil price volatility. Political noise has increased this year ahead of the February 2015 presidential and gubernatorial elections. The Boko Haram insurgency has also intensified this year, though is geographically contained,” it stressed.
Source: Daily Newswatch
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